Highlights

SGH reports are highly valued for keeping clients and policymakers informed and well-ahead of consensus and the news cycle on the macro policy events driving global markets.

2020
May 05, 2020
SGH Insight
...there is also advancing political movement, most likely again through executive order, to preclude the U.S. government pension fund, the Thrift Savings Plan, from investing about $50 billion in an MSCI Index that includes Chinese shares.
Market Validation
(Bloomberg 5/12/20)
Trade Friction Over Virus Blame Saps Risk Appetite
Risk sentiment suffers a setback following President Trump’s decision to pull federal money out of Chinese equities and Beijing’s move to suspend meat imports from four Australian abattoirs. S&P futures fall as much as 1% and Asian indexes retreat; Hang Seng drops 1.8% and ASX 200 loses 1.3%; Kospi 0.8% lower. Shanghai Composite slips 0.6%, H shares 1.7% weaker. 10-year Treasuries hover near 0.69%; JGB futures edge higher on strong bond auction and Kuroda’s pledge to ease more if needed. The dollar strengthens against all G-10 majors except yen; Aussie underperforms. WTI July futures hold near $25.20; gold returns above $1,700/oz.
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March 22, 2020
SGH Insight
For those who will remember, the OMT facility was established in 2012 as an emergency facility where credit could be extended to sovereigns but only with stiff conditionality attached, under either a Precautionary Conditioned Credit Line (PCCL), or Enhanced Conditions Credit Line (ECCL), modeled after the IMF.

A new, less stringent line can, however, be established we understand either in revising the existing ECCL standards, or by coming up with a new dedicated instrument created solely for the COVID -19 crisis response.

The creation of an entirely new instrument, if proposed by the Commission, can be done through a vote of the ESM’s Board of Governors, meaning the Eurozone finance ministers. Some ministers/governors would need to then obtain national parliamentary approval – which under normal circumstances might be an issue in for example Germany, the Netherlands, and Finland. But these are far from normal times.

The ESM epidemic-focused tool, and its trigger mechanism, is being designed in a way where al Eurozone members would be eligible to tap the line. With the understanding that budget surplus countries Germany and the Netherlands, for example, would likely never need to tap such a line, its availability to everyone would be intended as a signal to remove stigma akin to the US Federal Reserve’s pressure on all US banks to tap the Fed’s Discount Window lines.

The borrowing the ESM would do on the open market if the need were to arise may be called “Corona-bonds,” but they will likely fall along similar fiscal rules as the current ESM and fall short of some hopes that they might represent a first step to full capital markets union “mutualization” of debt.
Market Validation
(Bloomberg 3/23/20)

Germany Ready to Back a Rescue Plan to Help Italy Weather Virus
Berlin sees ESM credit line for Italy with minimal conditions
Finance ministry not ready to move on joint coronavirus bonds
By Birgit Jennen and Viktoria Dendrinou

German officials are ready to help Italy get through the coronavirus pandemic and are prepared to support an emergency loan from the euro area’s bailout fund.

The preferred option in Berlin would see Italy granted an enhanced credit line by the European Stability Mechanism with minimal conditionality, according to a German official with knowledge of the government’s thinking. While Chancellor Angela Merkel has said she’s happy to discuss Italy’s request for jointly issued coronavirus bonds to shore up euro members’ finances, the official said Germany isn’t ready to move forward with that idea.

BTPs Extend Gains; Germany to Help Italy Combat Virus Crisis
By James Hirai

BTPs rise, extending outperformance over peripheral peers, after Germany says it is prepared to help Italy weather the impact of the coronavirus.
Italy’s 10-year yield falls as much as 7bps to 1.56%, paring its underperformance over bunds to 2bps at 197bps

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March 19, 2020
SGH Insight
** Our sense of the Fed’s current crisis management thinking – and we can only imagine what hours are being put in — is that the Fed is not thinking of YCC as a liquidity tool to currently put to use, but are instead still extremely focused on moving forward with additional alphabet facilities to target a smoothing of market functioning.

** We understand many Fed officials have been frustrated with the dealer/banks and that the massive repo operations have not been reaching to where the liquidity is needed. But, on the other hand, there looks to be an accumulative calming across most of the markets in the wake of the QE purchases, the flood of repo, and the string of new targeted facilities and swap lines. So we still expect more of what could be best described a market functioning targeted vehicles, among them:

** The one at the top of the Fed menu, we believe, is a reworked version of the 2008 Term Asset-Backed Securities Loan Facility (TALF), in which the Fed purchased newly originated asset-backed securities. There is no way of knowing with certainty, but we believe its likely reincarnation will entail a fine tuning to reach a targeted small to medium sized business sector, and with perhaps looser credit ratings than just AAA paper. Whatever its final form, a TALF or a similar vehicle will require Treasury authorization and a credit backstop, either from Treasury through its Exchange Stabilization Fund or from Congress in one of the huge fiscal stimulus bills storming across Capitol Hill (the original TALF was funded through TARP money).
Market Validation
(FT 3/24/20)

Global stock markets swung higher on Tuesday, buoyed by the latest efforts by the US Federal Reserve to support the economy, as the turbulence that has taken hold over the past few weeks showed little sign of abating. European bourses jumped in morning trading, with the continent’s Stoxx 600 index rallying 4 per cent. London’s FTSE 100 rose more than 3 per cent, while Frankfurt’s Dax advanced 5.3 per cent. The rally in Europe followed on from significant rises in Asia in response to the Fed’s pledge to buy an unlimited amount of bonds. “This is the Fed’s ‘whatever it takes’ moment,” wrote analysts at Invesco, referring to then-European Central Bank governor Mario Draghi’s 2012 pledge to save the euro. That was, they noted, “one of the most aggressive monetary easing programmes in the history of central banking”.

Federal Reserve announces extensive new measures to support the economy

https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323b.htm

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February 14, 2020
SGH Insight
Global attention on the newly dubbed “Covid-19” virus has been focused on ground zero of the epidemic in China, and on monitoring pockets of super-spreaders such as in Singapore.

But the virus has proven an enormous source of concern also in Japan, given its proximity to China, and the strong interrelationship between the number two and number three economies of the world.

** The first source of concern in Tokyo is over the potential for the spread of the Covid-19 virus itself: out of the 32 million visitors to Japan in 2019, a whopping 30% are estimated to have come from China. **

** And from an economic perspective, the virus fallout is coming on the heels of a severe downturn already at the end of the year in activity, as evidenced in declining industry production levels, a buildup in inventories, and a downturn in private consumption. **

** But cynically speaking, the virus may provide political cover for Japan’s Prime Minster Shinzo Abe in distancing what is an increasingly sharp slowdown from the impact, primarily, of the government’s well telegraphed, but still controversial, VAT tax hike last October 1 from 8% to 10%. **

That respite for Abe, however, may prove short-lived, as local economists increasingly eye the possibility that Japan may enter a recession in the not too distant future.

Market Validation
(Bloomberg 2/17/20)

Treasury Futures Dip, BOJ Rate-Cut Pricing Firms After GDP Miss

Treasury futures are a touch lower. Long-end JGBs gain, while BOJ rate-cut pricing gently firms after the nation’s Q4 GDP miss estimates.

Japan’s gross domestic product shrank at an annualized pace of 6.3% from the previous quarter in the three months through December, the biggest slide since a previous tax increase in 2014, according to a preliminary estimate by the Cabinet Office Monday.


Economists surveyed had predicted a fall of 3.8%, flagging the adverse impact of the tax hike, weak global demand and typhoon disruption. The far worse-than-expected outcome showed that some of the government confidence in measures to cushion the blow of the tax hike was misplaced.

The result also raises the possibility that with the virus outbreak still spreading, Prime Minister Shinzo Abe may have to consider another round of extra spending to support growth, little more than two months after his most recent stimulus package.

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February 03, 2020
SGH Insight
** Saudi Arabia is unlikely to press for large-scale near term output cuts of up to 1 million barrels per day when the OPEC Joint Ministerial Monitoring Committee meets this week, but it will support a more cautious collective cut in the OPEC+ output of around 500,000 barrels per day as the most prudent response to the impact of the Chinese coronavirus outbreak on crude oil demand.

** And as of today, Saudi officials are also likely to seek a delay on a decision whether to bring forward to February the scheduled March OPEC+ Ministerial meeting until there are at least some clearer indications of how sustained the drop in crude demand will prove to be, and if others are indeed willing to take action, however small, as the new Saudi Energy Minister has repeatedly advised that everyone was in this together.

** There is a concern also in signaling a panic – a fear voiced by Russian oil officials – and which might elevate expectations for the deeper output cuts Saudi oil officials are for now very reluctant to commit to when it is still unclear how sustained the drop in crude demand will be.
Market Validation
(Bloomberg 2/6/20)

Oil pared gains as an OPEC+ committee agreed on a required level of output cuts, but didn’t reach a decision on an emergency meeting as Russia resisted. The panel recommended a production cut of 600,000 b/d to offset the demand impact from the coronavirus outbreak. Following three days of discussions in Vienna, there was no agreement on if ministers from OPEC and its allies should meet this month to ratify the JTC’s suggestion. Russian Energy Minister Alexander Novak reiterated on Thursday that his country needs more time to assess the impact of the outbreak.
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2019
December 05, 2019
SGH Insight
But despite recent expressions of frustration with the pace of negotiations by President Trump, Chinese sources still believe he very much cares about striking a first phase deal with China soon, and continue to believe, despite Commerce Secretary Wilbur Ross’ warnings to the contrary, that they have assurances the threatened December 15 tariffs will not be imposed if there is progress, but still no deal, by then.

As to the remaining hurdles to a deal, Chinese negotiators reiterate that the US must agree to roll back current tariffs in a trade agreement, and not just avert the upcoming tariffs scheduled for December 15. This rollback could be in several stages (presumably starting with last September’s tariff hikes), but however it is presented, Beijing wants a path to seeing all tariffs removed if the US is to “show sincerity” on its negotiating side.

Indeed, the complication for Beijing is that while President Trump has attempted to pull China into concrete commitments to multiple years of (unrealistically) ambitious agricultural purchases in this “phase one” agreement, there is no assurance in reality there will ever be a “Phase Two” to address some of China’s concerns about the existing tariff regime. So Beijing, we believe, has doubled down in pushing for a roadmap, at least, for the removal of all tariffs in this round.

All said, sources in China remain “cautiously optimistic” a phase one deal can be signed, but as we have written, not by December 15, but perhaps, if all goes well, they now expect it could happen before the advent of the Chinese New Year, on January 25 of next year.

Market Validation
CNBC 12/13/19

Stocks were little changed on Friday after China and the U.S. agreed to a phase one trade deal as investors concluded a solid week of gains.
The trade deal will include a rollback of some of the China tariffs and halts additional levies set to take effect on Sunday. China agreed to significant purchases of U.S. agricultural products, but the amount is below what the White House was reportedly pushing to get. On the U.S. side, investors were hoping for more than just a partial rollback of some tariffs.

The Dow Jones Industrial Average ended the day just 3.33 points higher at 28,135.38. The S&P 500 closed just above the flatline at 3,168.80 while the Nasdaq Composite gained 0.2% to 8,734.88. Earlier in the day, the major averages hit record highs.

U.S. Trade Representative Robert Lighthizer said China will buy $40 billion in U.S. agricultural goods. That’s below the $50 billion Trump was reportedly looking for. He also said both sides are aiming to sign the agreement in January.
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December 03, 2019
SGH Insight
*** And third, while it is early days to be sure, we think there is very likely to be a boost to German spending next year and in 2021, even if modest. Despite Berlin’s defiant insistence there is no case for deficit-financed spending in Germany, our sense is that the demand to loosen the “black zero” fiscal policies so central to Walter-Borjans and Esken’s winning leadership campaign enjoys a far wider support across the main political parties than assumed. Indeed, “black zero” is less an ideological constraint than a pragmatic calculation, the timing and eventual scale to a softer “guiding principle” in the interpretation of the fiscal brake driven to a large extent by the eventual impact of Brexit on the German economy. ***
Market Validation
(Bloomberg 12/5/19)

Bunds Extend Declines as SPD Party Seeks Fiscal Spending Boost
By James Hirai
Bunds extend losses as Germany’s SPD party, part of the ruling coalition, seeks a massive spending increase.
German 10-year yield climbs 2bps to -0.29%; core bonds outperform semi-core and peripheral peers

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November 13, 2019
SGH Insight
President Donald Trump’s threat yesterday to hike tariffs “substantially” if there is no trade agreement with China soon, and press reports of pushback by hawks within the White House and Trump himself against Beijing’s demands that US tariffs be rolled back have raised concerns in markets over the status of current trade negotiations between China and the United States.

*** Despite those concerns, we continue to believe there will be a “phase one” deal signing, albeit most likely now in early December, and we would put the odds on that as high as 80-90%. Senior officials in Beijing, at least, believe they received assurances in a call on Friday that the US side would agree to remove tariffs imposed on each other’s products, “in different phases, after both sides make progress” in reaching a deal. ***
Market Validation
(Bloomberg 11/15/19)

Yen Falls With Treasuries on Kudlow Trade Comments

The yen weakened against all its Group-of-10 peers after White House economic adviser Larry Kudlow said the U.S. and China were close to finalizing the first phase of a trade deal. Commodity currencies rose.
USD/JPY gained for the first time in six days, advancing on demand from fast money accounts after Kudlow’s comments, according to Asia-based FX traders. “We are coming down to the short strokes,” Kudlow said referring to trade talks
Exporters bought the Australian and New Zealand dollars following his remarks, according to traders. Treasuries slipped while U.S. stock index futures rose to a record high
USD/JPY advanced 0.2% to 108.59; pair is down 0.6% this week, the most since the five days ended Oct. 4
The 10-year Treasury yield rose 2bps to 1.84% after falling 7bps on Thursday. Bloomberg Dollar Spot Index fell 0.1% in a second day of declines
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November 04, 2019
SGH Insight
** In looking ahead, the message went on that if the two sides reach a phased trade agreement, China, will “consider removing” (meaning they will remove) extra tariffs on most US agricultural products, and “both sides” (meaning more importantly the US side) will give up additional rounds of tariffs threatened on each other for December 15.

** Not anticipated by markets, Beijing is also asking that in return for its lifting of the extra tariffs on US agricultural imports that it imposed in tit-for-tat escalations with the US, the US should consider removing equal amounts of tariffs that it imposed on Chinese products. That would be above and beyond a simple ceasefire on the December 15 tariff threats.

Market Validation
(Bloomberg 11/5/19)

Global Bond Sell-Off on China Trade Thaw Revives ‘Tantrum’ Fears
French yields climb back toward 0% for first time since July
It’s starting to ‘smell’ like bond rout of 2015, says Danske
A sell-off across global bond markets deepened after further signs that trade tensions between the U.S. and China may be easing.
Japanese bonds, U.S. Treasuries and European securities all slumped as the potential removal of U.S. tariffs on Chinese goods revived optimism over the economic outlook. In Europe, where sovereign yields have hit record lows this year on fears of recession, French rates climbed to near positive territory for the first time since July.
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November 04, 2019
SGH Insight
** In looking ahead, the message went on that if the two sides reach a phased trade agreement, China, will “consider removing” (meaning they will remove) extra tariffs on most US agricultural products, and “both sides” (meaning more importantly the US side) will give up additional rounds of tariffs threatened on each other for December 15.

** Not anticipated by markets, Beijing is also asking that in return for its lifting of the extra tariffs on US agricultural imports that it imposed in tit-for-tat escalations with the US, the US should consider removing equal amounts of tariffs that it imposed on Chinese products. That would be above and beyond a simple ceasefire on the December 15 tariff threats.
Market Validation
(Dow Jones 11/7/19)

Stocks Open Higher on Signs of Progress in U.S.-China Talks

Stocks rose Thursday in early U.S. trading after China said Beijing and Washington agreed to lift some existing tariffs if a deal is struck, signaling that trade talks are progressing.
The Dow Jones Industrial Average index climbed 0.5%, while the broader S&P 500 rose 0.2% and the Nasdaq Composite Index added 0.5%. Earlier, the pan-continental Stoxx Europe 600 gauge had risen 0.2%.
Following negotiations over the last two weeks, China and the U.S. agreed to remove tariffs at the same time and by the same amount when they sign the initial accord, a Chinese Commerce Ministry spokesman said Thursday. The yield on 10-year Treasurys rose to 1.879% from 1.814% on Wednesday.

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October 11, 2019
SGH Insight
Chinese officials expect the following deal, barring an unlikely last minute “accident” in advance of Liu’s meeting this afternoon in the Oval Office with Trump (see SGH 9/30/19, “China: A “Mini-Truce,” with Major Tensions”).

** China will make “substantial” purchases of US agricultural products, and the US will not raise the existing tariffs on $250 billion of Chinese imports from 25% to 30% as threatened on October 15.

** We continue to get no indication, however, that the 25% tariffs will be rolled back, yet – note that this has not been a demand we have heard from Beijing for a very limited cease-fire – nor do we have indication that there will be any assurances at this point from the US over the threatened next round of December 15 tariffs.



Market Validation
(WSJ 10/11/19)

U.S. stocks surged Friday as investors cheered progress on trade negotiations between the U.S. and China, helping the S&P 500 break a three-week losing streak.

President Trump said just before the closing bell that the two countries reached a “very substantial Phase One deal” and agreed not to implement tariffs set to go into effect next week. China, meanwhile, said it would increase purchases of U.S. agricultural products.

The Dow industrials closed up 319.92 points, or 1.2%, to 26816.59. The index rose as much as 517 points earlier in the session but pared some of those gains as traders learned that two pressure points remained unresolved: a final decision on a new round of tariffs set for December and policies around Chinese telecom giant Huawei Technologies Co.
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October 08, 2019
SGH Insight
The prospects for a narrow, “skinny” truce are still alive, barely – even with the latest sanctions from the US on 28 Chinese technology firms over human rights, the salvo from China’s beloved US National Basketball Association on Hong Kong, and, most importantly, indications that some internal deliberations over elements of the “Equitable Act” restrictions on investments from and into China are, despite “denials” by the White House, very much alive . If the mini-truce that was lubricated by increased Chinese purchases of US soybeans before this week’s talks does indeed materialize, the most likely result, sources say, will be for Beijing to make a limited commitment to purchase major US agricultural products that are not below last year’s modest numbers. In return, the US must agree not to hike tariffs on $250 billion of Chinese goods, and the two sides could then agree, if all goes well, to sign an interim bilateral trade agreement in November.
Market Validation
(Bloomberg 10/9/19)

Stocks in Europe jumped with U.S. index futures as China revived hopes of progress in trade talks with America this week despite a host of potential headwinds. Treasuries and gold turned lower. The Stoxx Europe 600 index extended gains in a broad-based advance and futures on the S&P 500 also added to an increase after a report that China is still open to agreeing on a partial trade deal with the U.S., despite tensions building this week.
* The Stoxx Europe 600 Index rose 0.7% as of 10:21 a.m. London
time.
* Futures on the S&P 500 Index jumped 0.8%.
* The U.K.‘s FTSE 100 Index gained 0.5%.
* The MSCI All-Country World Index climbed 0.1%.
* The MSCI Emerging Market Index fell 0.3%.
* The yield on 10-year Treasuries gained two basis points to
1.55%.
* The yield on two-year Treasuries increased one basis point to
1.43%.
* Britain’s 10-year yield jumped four basis points to 0.456%.
* Germany’s 10-year yield gained two basis points to -0.57%.
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September 30, 2019
SGH Insight
As to the upcoming round of talks, Chinese negotiators maintain they do not hold out great prospects for reaching an “interim agreement.” But markets may nevertheless take solace at a mini-truce that would see a continuation of an increase in the purchase of agricultural products by Beijing, in exchange simply for an agreement by the White House to refrain from hiking tariffs on $250 billion of Chinese imports on October 15 from 25% to 30%, as currently threatened. That certainly appears to be a low bar for that mini-truce to be struck.

Market Validation
(Bloomberg 10/7/19)

S&P futures gap lower on report China is increasingly reluctant to agree a broad trade deal pursued by President Trump; Treasury 10-year yield drops a basis point to 1.52%. Japanese stocks slightly softer, ASX 200 index gains. Bloomberg dollar index rises; yen 0.1% stronger near 106.85/USD. Aussie 10-year futures climb 2bps to highest since August.



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September 23, 2019
SGH Insight
** As to last week’s vice-ministerial level meetings, sources in Beijing note that there was little progress on any substance in those talks, but enough goodwill was established between the two sides to pave the way for Vice-Premier Liu He to visit Washington in October, as hoped, for the 13th round of talks. From what we understand, preparations are being made now for the principals’ meeting between Liu, US Trade Representative Robert Lighthizer, and Treasury Secretary Steven Mnuchin for the week of October 6.

Market Validation
(Bloomberg 9/24/19)

U.S. equity-index futures advanced and European stocks rose modestly with Asian shares as investors weighed hopes for high-level trade talks next month against mixed economic data from around the globe.
Contracts on the three main U.S. equity benchmarks all pointed to a firm open after Treasury Secretary Steven Mnuchin confirmed Chinese Vice Premier Liu He is headed to Washington in coming weeks and China was said to have given waivers for tariff-free American soy purchases.

Stocks
Futures on the S&P 500 Index increased 0.3% as of 8:28 a.m. New York time.
The Stoxx Europe 600 Index increased 0.1%.
The Shanghai Composite Index gained 0.3%.
The MSCI Emerging Market Index climbed 0.1%.
Bonds
The yield on 10-year Treasuries sank three basis points to 1.70%.
The yield on two-year Treasuries declined one basis point to 1.67%.
Germany’s 10-year yield climbed less than one basis point to -0.58%.
Britain’s 10-year yield gained one basis point to 0.558%.
Japan’s 10-year yield fell three basis points to -0.234%.

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September 18, 2019
SGH Insight
First, the easiest quick fix to the ending stress would be a third downward tweak to the spread of the Interest on Excess Reserves rate over the bottom end of Fed Funds range by at least 5 basis points. So we assume it is almost certain the formal policy statement from the Federal Open Market committee will include an implementation note that the IOER will be cut by a larger 30 basis points, putting the rate at 1.80%, relative to the highly likely 25 basis point cut in the target range for federal funds to 1.75%-2%.
We are hesitant to fully buy into the argument of the expanded balance sheet being announced today. We do not hold any strong conviction one way or another on this front, but we would wonder whether the FOMC will be more inclined to address the short term funding stresses through a further expansion of repo operations to whatever scale required rather than outright purchases and an expansion of the overall balance sheet. It feels like it would be too rushed for the FOMC to jump straight into an expansion of the balance sheet today without a longer lead time to fully work out the fine tuning details and to prepare and explain that is a technical adjustment and not an additional statement of further easing in monetary conditions.
Market Validation
(Bloomberg 9/19/19)
Swap Spreads Crater to Record Low; Basis Squeeze Effect Resumes

Dollar swap spreads resume post-FOMC slide
with 2-year tenor dropping to record low dating back to late
1980’s. The post-FOMC tightening move has accelerated over
Thursday’s U.S. afternoon session across the curve in a sign of
market disappointment after expectations had built up for the
Fed to introduce a more permanent solution to the recent repo
squeeze.

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September 16, 2019
SGH Insight
A 25 basis point rate cut is all but certain to be announced this coming Wednesday afternoon when the Federal Open Market Committee concludes its two-day September meeting. Now the overhang of the shock attack and disruption to Saudi Arabia’s oil output is certain to add to the growing sense of uncertainties and risk probabilities hanging over the FOMC’s deliberations. Whether the 2019 median comes in at no more rate cuts after this Wednesday, or perhaps just showing one more cut feels almost beside the point; in any case there is likely to be enough rate dots showing still one more easing beyond the expected rate cut on Wednesday is on the table. Equally, the rate dot projections further out will carry even less real information, though it is probably safe to assume the medians will not be as gloomy as the market pricing. The rate dots for 2022, for instance, may prove to show a clearer bifurcation of the Committee projections, with nearly half showing a return to rate hikes, perhaps even beginning in 2021, while an equal near half showing an extended period of a flatlined policy rate.
Market Validation
(FT 9/18/19)

The Federal Reserve cut US interest rates by 25 basis points, to a range of 1.75 to 2 per cent and signalled that it could stop there despite uncertainty over trade and fierce pressure from the White House for more accommodation.

The one-notch cut was in line with the expectations of investors and economists, but its projections show a more hawkish line than markets had anticipated. The median projection among its rate-setting committee showing a flat path through the end of 2020.

Futures data compiled by Bloomberg before the meeting showed that investors had expected two more cuts by the end of 2020.

Treasuries lost earlier gains following the Fed’s widely expected cut, with the yield on the 10-year note climbing to 1.775 per cent. The yield on the policy-sensitive two year note jumped from 1.66 per cent ahead of the announcement to 1.72 per cent.

US stocks slipped, with the S&P 500 down 0.7 per cent and the Dow Jones Industrial Average down 0.6 per cent. Meanwhile the dollar rose 0.31 per cent.

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September 05, 2019
SGH Insight
Since Bank of Finland Governor Olli Rehn delighted markets in mid-August in calling for the European Central Bank to overdeliver on expectations with an “impactful and significant” stimulus package at its upcoming rate setting meeting on September 12, no less than five of his fellow Governing Council members have publicly come out against a package next week that would include a resumption in the ECB’s Asset Purchase Program.

*** We believe, despite the frayed consensus within the Governing Council, that a bond buying program in perhaps the 20-30 billion euros per month range was nevertheless included in the options presented on Tuesday to ECB officials for consideration in the run-up to the final stimulus decision next week. ***

*** The first course of action next week, and where there is clearly far greater consensus, remains on the interest rate side, where we believe the proposed options include a cut of 10 or 15 basis points in the ECB’s currently negative 0.4% benchmark deposit rate. While a handful of analysts may expect, or hope for, a larger 20 basis points cuts, we do not understand that to be on the table. ***

That cut will be accompanied as expected with “mitigating measures,” or tiering, to exempt some bank deposits from the deeper punitive rates and soften the blow on the Eurozone banking sector. We suspect that tiering will be limited – after all negative rates are not the core issue ailing Eurozone banks – and could be tied to metrics that would ensure that the banks that do receive relief are in turn doing their part in lending money out into the system.

Market Validation
(Bloomberg 9/12/19)

Treasuries Climb, Following Bund Rally After ECB Policy Decision

Treasury futures hit highest levels of the day as bunds jump following ECB policy decision to restart quantitative easing from November 1, while cutting deposit rate by a further 10bp to -0.5%.
European bonds rally with Italian 10-year yields dropping as much as 12bp while bunds richen ~4bp, outperforming Treasuries by 2.5bp
Treasury 10-year yields drop back to 1.70%, richer by 3.5bp on the day; front-end and belly led gains steepen 2s10s and 5s30s post-ECB announcement

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August 26, 2019
SGH Insight
Indeed, in a meeting on Saturday in Zhongnanhai that was attended by China’s highest leadership, President Xi Jinping, from what we understand, characterized the President’s latest round raising of the rate of tariffs on almost all Chinese imports as a sign of “hysteria” and “desperation.”

Trump, Xi said, cannot be allowed to bully China, and unless his administration was to fully accept Beijing’s three principles, there would be no bilateral agreement between the two countries.

The first of those principles, as a reminder, is the removal of all the Trump administration tariffs on Chinese exports to the US.

Having said that, after Friday’s fireworks, Xi added there was no need to immediately escalate again with further additional tariffs – at least not yet.

In the meantime, he instructed Premier Li to convene a meeting on Saturday afternoon to go over a series of further countermeasures against the US, if needed.
Market Validation
(Bloomberg 8/29/19)

China indicated that it wouldn’t immediately retaliate against the latest U.S. tariff increase announced by President Donald Trump last week, emphasizing the need to discuss ways to deescalate the trade war between the world’s two largest economies.

“China has ample means for retaliation, but thinks the question that should be discussed now is about removing the new tariffs to prevent escalation of the trade war,” Ministry of Commerce spokesman Gao Feng told reporters in Beijing on Thursday. “China is lodging solemn representations with the U.S. on the matter.”

Stocks across Asia pared losses and European stocks turned higher with U.S. equity futures as investors interpreted the comments as an olive branch from Beijing aimed at getting talks back on track.
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August 16, 2019
SGH Insight
** The same sources, however, expect that Trump will go ahead and impose the 10% tariffs, as threatened, on some Chinese exports on September 1 – and that will be a problem for Beijing. For Beijing’s part, the imposition of any new tariffs, no matter how it is packaged, would violate the consensus reached behind closed doors between Trump and China’s President Xi Jinping on the sidelines of the June 28-29 G20 summit in Osaka, Japan. As such, it will elicit a response.

** Assuming the 10% tariffs are imposed on September 1, even if there is some movement on Huawei, China, from what we understand, will adopt “two-part countermeasures, including tariffs and non-tariffs,” in response. On the non-tariff side, Beijing will, for starters, “severely” control the export of rare earth materials to the United States (see SGH 8/12/19, “China: Trade Retaliation Plans”). In addition, and much more visible to the markets and farm states dear to Trump’s re-election bid, Beijing will continue its suspension of large-scale purchases of agricultural products from the United States if tariffs are imposed – even if there is, as expected, some limited movement on Huawei.
Market Validation
(Bloomberg) -- U.S. stocks fell in early trading after China announced plans to impose retaliatory tariffs on $75 billion of American goods including soybeans, autos and oil.

S&P 500 down 0.4%

Dow Jones Industrial Average falls 0.4%

Nasdaq Composite down 0.6%

(Bloomberg) -- European equities sharply erased gains as automakers and oil shares slumped after China retaliated against the U.S. with additional tariffs.

The Stoxx Europe 600 Index retreated 0.3% after wiping out an advance of as much as 0.6%. China will slap an extra 5% tariff on American soybeans and crude-oil imports starting next month, and a 25% duty on U.S. cars will resume Dec. 15. Total SA and BP Plc fell at least 1% and Daimler AG tumbled 2.2%.

(Bloomberg) -- The greenback reached the highest since December after reports China will levy retaliatory tariffs on another $75b of U.S. goods in two batches, on Sept. 1 and Dec. 15. China will impose an extra 5% tariff on soy beans from Sept. 1 and will resume 25% duties on autos from Dec. 15.

(Bloomberg) -- Oil tumbled in New York, erasing this week’s gain, as China’s retaliation against U.S. tariffs spurred fears the trade war will deal an even bigger blow to demand.

Futures fell 3.1%, turning what had been a weekly gain into a loss of 2.3%. China will impose additional levies on $75 billion of U.S. goods, with tariffs of 5% on imports of American crude, in response to President Donald Trump’s latest moves

(Bloomberg)November soybean futures in Chicago fell as much as 0.9% after the news, reaching a two-week low. The contract had been trading higher earlier in the session.
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August 12, 2019
SGH Insight
Three weeks ago, China’s State Council reviewed and approved the National Development and Reform Commission’s (NDRC) plans for major industrial production output, as well as the joint NDRC/Ministry of Commerce plans for commodity imports and exports for the second half of 2019.

*** Perhaps of greatest immediate relevance to markets, both the NDRC and MOC planning is now predicated on the assumption that President Donald Trump will indeed impose the 10% tariffs on roughly $300 billion of Chinese exports to the US, as threatened, on September 1. ***

*** As such, from what we understand, three departments have recommended that the central government cease purchases of agricultural goods from the US — entirely — should that next round of tariffs, as now expected, be imposed. ***

*** Furthermore, China would significantly curtail exports of rare earth materials to the US and impose 25% price hikes on those that do go out, should the Trump administration proceed with its 10% tariff threat. And should Trump then escalate the tariffs from 10% to 25%, the proposal is to cut rare earth exports to the US entirely. ***

By this point, most all senior sources canvassed in Beijing do not expect a trade agreement with the US to be reached at all in 2019.
Market Validation
(Bloomberg 8/15/19)

Stocks Slide as China Vows Tariff Countermeasures: Markets Wrap

U.S. equity futures fell and European stocks
slumped on Thursday as China stepped up its trade-war rhetoric,
roiling markets that had been starting to calm. Treasuries and
European bonds rallied.
Futures for the three main U.S. stock gauges had jumped
during the Asian session in the wake of Wednesday’s rout, but
they reversed after Beijing pledged countermeasures to the next
round of tariffs threatened by the White House, saying they
violate accords already reached by Presidents Donald Trump and
Xi Jinping.
* Futures on the S&P 500 Index dipped 0.4% as of 7:02 a.m. New
York time.
* The Stoxx Europe 600 Index fell 1.2%.
* The U.K.’s FTSE 100 Index fell 1.6%.
* The MSCI Asia Pacific Index declined 0.7%.
* The yield on 10-year Treasuries fell six basis points to
1.52%.
* The yield on two-year Treasuries decreased seven basis points
to 1.51%.
* Germany’s 10-year yield declined three basis points to -0.68%.
* Britain’s 10-year yield dipped three basis points to 0.448%.
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